Why Banks Do Not Pay Interest on Savings Accounts Anymore

The myth that banks should pay higher interest on savings accounts due to inflation persists, but it is, in fact, a long-standing misconception. In the past, there was a direct link between inflation and savings interest rates, but this is no longer the case.

The Old Financial Model and Its Misconceptions

Many people still believe that there is a direct relationship between savings and lending, as was the norm in the past. In this model, banks relied on savings to fund their lending activities, ensuring that loan and savings interest rates were interconnected. However, modern banking operations have evolved significantly, and this historical linkage no longer exists.

Modern Banking Operations: Raising Funds on the Open Market

Contrary to the old model, modern retail banks do not need to rely on savers to fund their loan activities. Instead, they raise funds from the open market, which allows them to maintain lower interest rates on savings accounts. This change in funding methods has led to a significant shift in the structure of bank profits. In the past, retail bank profits were limited to the difference between loan interest rates and savings interest rates. Today, however, banks earn their profits based on the spread between the loan interest rates at which they borrow and the loan interest rates at which they lend.

The Role of Marketing and Consumer Beliefs

Banks continue to perpetuate the old financial model through their advertising, making the concept simple and appealing. While it has a certain logic, it is fundamentally a falsehood. Many consumers still believe in the outdated model, even though it hasn't been relevant for over four to five decades. When inflation increases and loan rates rise, consumers expect savings rates to follow suit, but this is no longer the case.

The Future of Savings Accounts

The ongoing shift in the banking industry is reflected in the current low interest rates on savings accounts. Given the recent trend towards the use of payment and credit cards, the role of savings rates as a tool for capturing and retaining new customers is becoming less significant. As a result, it is only a matter of time before these accounts will require fees or even charge interest.

For consumers, it is crucial to understand the true nature of modern banking operations. The current low interest rates on savings accounts are not a result of a conspiracy but rather a consequence of the shift in banking models. It is important to be aware of this change and to consider alternative ways to manage your finances, such as investing in other financial instruments or seeking better banking solutions that offer higher returns.